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Public procurement update: Court of Appeal makes first declaration of ineffectiveness for a development agreement in the Faraday case

On 14 November 2018, the Court of Appeal published its judgment in Faraday Development Ltd v West Berkshire District Council which has potentially wide-reaching implications for developers and public authorities alike.

The Court’s judgment overturned the decision of the Mr Justice Holgate and found that a ‘public works contract’ (as defined in the Public Contracts Regulations) includes a development agreement which only has contingent obligations on the developer to carry out works. This potentially expands the scope of contracts caught by the Public Contracts Regulations 2015.

Facts

West Berkshire District Council sought a developer for an industrial estate in Newbury, Berkshire. The Council appointed St Mowden as developer without a formal procurement process and included within the development agreement an option for the developer to draw down parcels of the land for development.

Prior to the signing the development agreement, the Council had issued a Voluntary Ex-Ante Transparency (VEAT) notice stating that it did not consider the procurement to be a ‘public works’ contract under the procurement regulations. Faraday, a rival developer, challenged that assessment and argued that the Council should have carried out a formal procurement exercise.

Court of Appeal’s judgment

The Court considered the existing case law which establishes that for a contract to fall within the ambit of a ‘public works contract’, the developer must assume an enforceable obligation to carry out works. At first instance, Mr Justice Holgate had interpreted the lack of a binding obligation on St Mowden to carry out works as being determinative that the agreement was not a public works contract.

The Court of Appeal differentiated an obligation from a contingent obligation. To determine whether a contingent obligation to carry out works would be a public works contract, the Court stated that it was necessary to look at the contract’s ‘real substance’ and to view the several stages of a multi-stage process as a whole. In doing so, the court examined whether the Council still had decisions to make before entering the agreement to carry out the works. The Court held that although the obligation was not immediately enforceable, if the developer exercised the option, the land would be drawn down and subsequently the obligation on St Mowden to carry out works would become binding.

The Court found that the Council had committed itself contractually, without any further steps being required of it, to a transaction that would fully satisfy the requirements of a “public works contract”. In doing so:

“the council effectively agreed to act unlawfully in the future. In effect, it committed itself to acting in breach of the legislative regime for procurement … whether as an actual or anticipatory breach [of the procurement rules] … or simply as public law illegality, or both.” (paragraph 62)

Ineffectiveness and VEAT notices

The decision marks the first use of a declaration of ineffectiveness by an English court since its introduction in 2009. This remedy means that the contract is ineffective from the time the declaration is made.

The Council had argued that because it had issued a VEAT notice, it should have been protected from an ineffectiveness finding. However, the Court found the VEAT notice to be invalid because it provided insufficient detail of the Council’s reasons for not procuring the contract formally. Relying upon the Fastweb case, the Court found that:

“what is required is a clear and unequivocal explanation of the reasons that led the contracting authority to the view that the contract could be awarded without following the procedure for public procurement. Essential to this is that interested third parties, which in this case would clearly include Faraday, are able to decide “with full knowledge of the relevant facts whether they consider it appropriate to bring an action.” (paragraph 87)

Lindblom LJ was critical of the Council’s insufficient portrayal of the contract within its VEAT notice. It had failed to include references to the provisions for the design and execution of the development and included only one positively phrased statement: ‘an exempt land transaction’, which was held to be an inadequate reflection of the agreement.

The Court also found that that the defective VEAT notice would not start the clock on a damages claim (generally a 30 day time period). However, the Court found that any damages claim by Faraday was out of time although the Court decided to impose a nominal penalty on the Council of £1.

Comment

The case is important in that it marks the first use of the ineffectiveness remedy by an English Court which may encourage further use by the Court of the remedy in future.

It is also important for developers and public authorities in providing some guidance on when a development agreement might be caught by the public contracts regulations. The Court’s inclusion of contingent works obligations causes some problems for developers and public authorities alike. This will create some uncertainty for existing agreement and future projects. It will likely encourage more public authorities to carry out formal procurement exercises in circumstances where they have relied on the land exclusion or used VEAT notices in the past.

The Court’s finding of invalidity of the VEAT notice in the case is also interesting and public authorities will need to be careful in providing their reasons in drafting future VEAT notices to ensure they are valid and start the clock running on damages actions.

If you require any advice or assistance on any issued raised by the case, then please contact David Kilduff, Richard Auton or Richard Butterworth below.